Gold, silver and oil markets hope for better year

Prospects are bright for gold, silver, but oil’s a guessing game

SAN FRANCISCO (MarketWatch) — As the year draws to a close, oil is poised for a sizable loss, gold readies for its smallest annual gain since 2008 and commodity traders look forward to a potentially better new year.

“The commodity complex had a fairly lackluster performance in 2012,” said Elliott Orsillo, co-founder and portfolio manager at Season Investments LLC.

Asians use gold vaults to store designer bags

(3:47)

China's gold demand is increasing, giving gold-vault companies opportunities to expand in Asia. The WSJ's Simon Hall discusses how some people are using high-security spaces to store luxury consumer goods.

For the year as of Thursday, oil futures
US:CLG3
traded nearly 10% lower, while gold
US:GCG3
tacked on about 5%. Silver
US:SIH3
gained over 6%.

The year 2012 has been one of obsession with the European Union meltdown, which didn’t happen, and monetary expansion, which did in the form of a third round of quantitative easing from the U.S. Federal Reserve, according to Christopher Ecclestone, a mining strategist at Hallgarten & Co.

“Yet both failed to provide either the downward or upward stimulus that pundits wanted,” he said. So for metals, “QE3 has gone off like a damp firecracker and not lit a fire under any metal.”

With expansion of central-bank quantitative easing, also referred to as money printing to increase the money supply, investors have bet that commodities will protect them from decreased currency value.

But that hasn’t helped so far, said Chris Mayer, managing editor of Agora Financial and editor of newsletter Capital & Crisis.

“Since peaking in the summer of 2011, most every commodity index is lower, despite massive liquidity expansion by central banks,” and that trend is likely to continue, he said.

Year to date, the Thomson Reuters/Jefferies CRB Index
XX:CRY
a commodities benchmark, is down about 3%.

Aside from gold, which he said can easily top $2,000 an ounce in 2013, Mayer was mostly bearish on commodities: “The great bull market is over, and I’ve been telling my readers to [...] reduce their exposure.”

Gold and silver appeal

Gold, in particular, had many reasons to rally, but didn’t perform as well as most analysts expected, while silver did well.

Both could do better in 2013.

Reuters

Gold and silver may see more gains in 2013.

This year, gold peaked near $1,800 an ounce in October, but failed to take out the 2011 highs of around $1,900, despite a combination of gold-price supportive factors, including euro-zone debt woes and the Fed’s quantitative easing.

“When a market should be acting bullish on bullish news yet does not, it represents a nervous condition,” said John Person, president of NationalFutures.com. And “when investors are nervous, they tend to stay out or sell, regardless what market it is,” he said.

The single biggest driver for gold and silver next year will likely be quantitative easing by the Fed and the European Central Bank.

The Fed’s recent decision to ramp up QE “represented a major escalation in its monetization of debt and is likely to continue through 2013 and well beyond,” said Brien Lundin, editor of Gold Newsletter. In Europe, “we should see the realization that very significant money printing will be necessary to address the union’s massive debt woes,” he said.

Silver may outshine gold next year, and considerably so, according to Kevin Kerr, chief executive officer of Kerr Trading International.

Its gain this year is set to more than reverse last year’s nearly 10% loss, but can’t compare to the almost 84% jump in prices it saw in 2010.

“Silver has been outperforming gold over the past decade, mostly due to price, but also because it has the industrial usage as well,” said Kerr, noting that with silver being cheaper than gold, it will be more “attainable as the ‘everyman’ metal.”

But for gold and silver to consistently advance, the markets will have to “avoid the kinds of fiscal crises and doomsday headlines that characterized much of 2012,” according to Lundin.

Oil’s guessing game

Oil prices were set to see their first annual loss in four years and will likely experience another year of guessing games for demand prospects.

Oil’s performance during 2012 has been “similar to that in 2011 — initial strength fueled largely by worries over the Middle East […] followed by sharp falls due to concerns about the world economy, then a rally on hopes of global policy stimulus,” said Julian Jessop, head of commodities research at Capital Economics.

“Confirmation of the launch for a third round of quantitative easing by the U.S. Fed appears to have marked at least a temporary peak in oil prices, which are ending 2012 on a lower note, partly due to fears over the fiscal cliff,” he wrote in a note.

Oil futures touched a high of nearly $110 early on in the year, then sank to below $80 by the middle of it. Recently, they traded at around $90 a barrel.

Oil prices next year will be a “double-edged sword of downside economic news and upside geopolitics,” said Matthew Parry, senior oil-market analyst at the Paris-based International Energy Agency. “I expect particularly heightened volatility.”

Parry forecasts a 2013 trading range of $65 to $100 a barrel for West Texas Intermediate oil.

Analysts at CPM Group expect WTI oil to trade in a range of $82 to $95, and said Brent crude oil may decline relative to WTI, but stabilize at around $100 or so. February Brent crude
UK:LCOG3
currently trades around $110 on ICE Futures in London.

“Strong oil production growth from unconventional sources in the United States has weighed on WTI oil prices in 2012,” the CPM Group analysts wrote in a recent report, adding that the trend is likely to continue in 2013, albeit at slower rates. “Stagnant to lower oil demand in most major industrialized economies could dampen some positive sentiment with regards to improving Chinese demand.”

On the supply side, there are conflicts in the Middle East to consider.

“No one knows whether the tensions in the Middle East would escalate further or ease in 2013,” said Fawad Razaqzada, technical analyst at GFT Markets.

“There is the possibility that Iran could start a nuclear war against Israel and the civil unrest that started in 2011 spreads to Saudi Arabia,” he said. “If any of those scenarios actually occur, the consequences on oil prices would be unimaginable. But any minor shocks should easily be absorbed as the supply of oil is and will remain plentiful in 2013.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.